PPI'S BIGGEST DROP EVER From Bespoke
Deflation: The Good, The Bad and The Ugly by Don Luskin
...Paulsen writes that "good deflation" is when businesses are "able to constantly produce goods at lower and lower prices due to cost-cutting initiatives and efficiency gains. This has allowed GDP growth to remain strong, profit growth to surge and unemployment to fall without inflationary consequence."
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Moving on now to "bad deflation," Paulsen writes that currently "…bad deflation has emerged because even though selling price inflation is still trending lower, corporations can no longer keep up with cost reductions and/or efficiency gains."Paulsen continues, "The world has been driven by a deflationary force since 1990 -- a force that represented bad deflation for Japan at the same time as it represented good deflation for the United States. The same deflationary trend which constantly defeated Japan in its effort to revive its economy had, simultaneously, been responsible for the ‘miracle 90s' U.S. economy… What seems to be happening, however, is bad deflation in the east is creeping westward!"
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Put this way, we can respond to the single biggest misconception about deflation that has appeared repeatedly in the press: that "falling prices are good for consumers." Perhaps we could say that this is true when we have "good falling prices," that is, due to productivity gains. But it is manifestly untrue when we have "bad falling prices." When prices fall because the central bank revalues the monetary unit of account, your gains in your capacity as a consumer are offset by your losses in your capacity as a producer. And everyone is both, so at best you break even.
But the press accounts usually overlook the core issue that really makes monetary deflation so bad. If you are a borrower, you are contractually committed to making loan payments that represent more and more purchasing power -- while at the same time the asset you bought with the loan to begin with is declining in nominal price. If you are a lender, chances are that your borrower will default on your loan to him under such conditions. And it's not just debtor/creditor relationships: any long-term contract for goods or services denominated in nominal dollars will have the same problem.The entire economy suffers from the cascading dislocations triggered by these defaults. It's why "bad falling prices" means monetary deflation isn't just bad -- it's "ugly."
Good Deflation and Bad Deflation From EconoWatch
For an in-depth understanding of the concept of Deflation, one needs to be well-acquainted with the two primary types or conditions of Deflations, namely the Good Deflation and Bad Deflation. In fact, both Good Deflation and Bad Deflation facilitate a clear understand of the nature of Deflation and its characteristic features.
Under normal circumstances, Deflation does not seem to be a good phenomenon, affecting the economy of a nation. At times, it is looked upon as a situation even worse than an economic depression. Theoretically, Deflation refers to low price of goods, which is indeed a matter of great relief to the consumers. But in reality, it is the Good and Bad Deflations which affect the economy of a nation.
About Bad Deflation:
Bad Deflation is born out of trifling demands. It is an economic situation characterized by reduction in the prices not due to developments in the productivities, but because of a lack of demand induced by crashing down of the stock market. In fact, Deflation becomes bad when the consumers save their money for future uncertainties, or in the expectation that prices may lower further.
Its implications and consequences:
It is the cumulative process of very little generation of demand which affects the population of a country at the time of Bad Deflation. Detection of Bad Deflation thus requires an in-depth study of the overall economic conditions of a nation and not just the price of goods.
Owing to Bad Deflation, the consumers who are the potential purchasers become unwilling to invest and buy, considering the future of their money and the country's economy. This leads to a fast fall in the prices, worsening the overall economic conditions further. Under the impact of Bad Deflation, the recessions are virtually all transformed into depressions. In reality, it is not the price fall of Bad Inflation which matters, but the serious consequences it gives birth to.
What is Good Deflation?
Good Deflation should not be considered as a hypothetical situation. It is very much a real condition of the economy, characterized by substantial growth and development in some sectors of a country, despite the fact that the prices of products in these sectors has been reducing since a long span of time.
In fact, Good Deflation results from technological progresses, which initiates excess supply of goods.
Its role:
From the consumer's point of view, Good Deflation is immensely beneficial as it helps those commercial sectors like the bank to deal with sinking prices. The banking sector of a country faces such as a situation, when the value of the collateral (securities) for loans decreases remarkably, having low sale value than what was earlier expected. This condition is far more aggravated by public debts and unemployment problem, which display rising trends.
This situation is controlled to considerable extents by the advent of Good Deflation. In the theoretical sense, Good Deflation does not allow the distribution of corporate gains among the employees, in the form of increase in their wages. Instead, decrease in the prices owing to Deflation is transferred to the consumers. This leads to uniform allocation of the profits, involving those also, who are not directly associated with production.
The debtors should evade price fall, which appears to them in the form of low rates of interest.
Good Deflation can only work when people have full faith in the future of the concept, which is closely related with the consumption and investments on their part. In fact, the customers consume and invest to meet their requirements and not the price expectations.
For Good Deflation to exist in an economy, it is required that there is no interference of any strong union, who may insist on productivity gain on behalf of the employees.
